Little drug firm may be big winner

Amarin, a small-cap orphan, pursues nerve disorders

By

ThomCalandra

SAN FRANCISCO (CBS.MW) -- Peter Lynch, the fund manager, once said he got really excited when he heard about a company that hadn't been visited by a Wall Street analyst for three years.

These days, three-fourths of all public companies with market capitalizations below $100 million fit that category. Leave it to Wall Street, as it pursues today's money flows, to ignore tomorrow's leaders.

The so-called world of small-cap stocks is almost always a source of adventure, especially toward year-end, when investors begin their search for new ideas. The payoffs can be enormous.

A year ago, no one on Wall Street or Main Street was willing to touch shares of Cray
CRAY, -2.23%
the supercomputer maker whose business seemed to be on the rocks. Executives pledged to turn a 2002 profit, raise $20 million or so and ship a new supercomputer that could rank as the world's most powerful.

No one cared. Cray's market worth at year-end 2001 was less than $95 million. Its market share for the monstrous computing machines employed by governments was tiny compared to IBM's 50 percent and greater share of the pie.

On Wall Street, Cray at this time a year ago was an orphan: Stuart Little without the Littles.

Almost 12 months later, a trickle of profits and burgeoning sales -- and some new, powerful products -- have turned the company's Nasdaq-traded shares into a monster, up almost fourfold to a market value of $350 million. Cray's executives expect sales of at least $200 million next year vs. about $150 million or so this year.

But this story is not about Cray. It's about one of the Crays that might lurk in the small-cap underbelly of the U.S. stock market.

First on my list is Amarin Corp.
AMRN, -3.82%
a $25 million British company that licenses and sells drugs to treat nerve disorders, like Parkinson's Disease. Amarin's chief executive, Rick Stewart, hails from SkyePharma (SKP), a British drug developer.

Stewart tells me Amarin's research partner, Laxdale of Scotland, will follow up any day now on preliminary findings from a Phase III study of LAX-101, a treatment for Huntington's Disease. "This is the first time we have seen anything positive for Huntington's," says Stewart, who is shaking his head about the market's treatment of the preliminary findings.

The study of 83 qualifying patients took place at Harvard, Emory and Johns Hopkins universities, and in the United Kingdom and Canada. Huntington's, a genetic disorder, has been diagnosed in about 30,000 Americans and an equal number of patients in Europe. The U.S. Food and Drug Administration has granted LAX-101 a so-called fast-track designation.

Stewart says investors are almost certainly awaiting the detailed findings of the late-stage clinical trial. Such findings, due out this month, will shed light on whether the drug regressed Huntington's symptoms in patients who are in varying stages of the disease.

"This is the first time we've had a genetic rating system for a pharmaceutical product," Stewart said in an interview. A genetic test determines the CAG score for Huntington's, which lays dormant for years. A score of 35 or higher indicates the presence of the disease. A score of 50 to 60 usually indicates a chronic case that will leave a patient with as little as five to eight years of life.

The executive says he would be ecstatic if the findings show that LAX-101 regresses symptoms in 90 percent or more of those with CAG repeat scores of less than 45. Laxdale will present the detailed findings to the FDA in late January.

"When you cut through all the detail, this could be a drug that is very significant for the treatment of Huntington's," he says. If the drug attains U.S. approvals, Amarin would receive 55 percent of all revenue, which its Marin County, Calif., sales force would generate.

Such a drug could fall into the $500 million yearly sales category, Stewart figures.

Stewart acknowledges his profitable company, whose shares trade on Nasdaq, has almost zero attention from Wall Street analysts. Amarin is forecasting sales of $65 million to $70 million for this year and earnings per share, after foreign-exchange gains, of 50 cents a share. The stock trades at $3, near an all-time low.

Stewart says investors may be wary of "the Elan overhang." Elan
ELN, +11.11%
an Irish company plagued by accounting troubles, owns shares in a number of small drug companies, including 39 percent of Amarin. Elan is under the gun to cut its roughly $3 billion of debt in half by year's end.

"We are on their books for $5 a share, and they are not going to sell it for a loss," says Stewart. Elan in late November sold majority-owned Athena Diagnostics to a private-equity firm for $122 million.

Stewart says he is confident his drug marketing company will benefit from several developments in coming months. Amarin owns the rights to Zelapar, a fast-dissolving lozenge that also is a therapeutic treatment for Parkinson's. Amarin's Swedish research partner is also developing a morphine product for possible sale in Japan.

At present, Amarin shares are under a generic cloud. Permax, a dopamine receptor that treats Parkinson's disease and achieved sales of about $30 million of Amarin's U.S. sales last year, is the subject of litigation by Eli Lilly
LLY, -1.48%
which holds the drug's patent.

Lilly is trying to prevent at least one generic drug maker, Ivax
IVX, +13.51%
from selling a non-branded version of the drug. Uncertainty about Permax "has people wondering," said Stewart in the San Francisco interview. "And people want visibility on the Huntington's product."

Last week, Teva Pharmaceutical
TEVA, -2.10%
said the FDA had approved its generic equivalent of Permax for immediate sale in the United States.

Top executives have sold no Amarin stock in the past three years, says Stewart. With stock options, management owns about 15 percent of the shares. "We think we can build a very profitable business specializing in neurological disorders," Stewart says.

Intraday Data provided by SIX Financial Information and subject to terms of use. Historical and current end-of-day data provided by SIX Financial Information. All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only. Intraday data delayed at least 15 minutes or per exchange requirements.